Home Equity Loan and Bankruptcy – What Happens Next?

A home equity loan and bankruptcy can be a confusing topic when put together. Don’t worry; we’re here to help you.

Each month, over 6,900 people visit our site for advice on home equity loans and similar matters. You’re not alone.

In this article, we’ll address the following questions:

• What happens to home equity loans after bankruptcy?
• What is a Deed of Acknowledgement?
• What happens to home equity loans after a Chapter 13 bankruptcy?
• Can you get a line of credit with a bankruptcy?
• Is it possible to get a home equity loan after bankruptcy?
• What are the pitfalls of a home equity loan?

Understanding home equity loans can be a bit tricky. That’s why we’re here to offer clear, simple advice to help you figure things out.

Ready to find out what happens to home equity loans after bankruptcy? Let’s get started!

What happens to home equity loans after bankruptcy?

Once you’re discharged from a Chapter 7 bankruptcy, any unsecured and secured lending will be wiped. This means you don’t have to pay your home equity loan in the same way you wouldn’t have to pay other personal loans or credit cards. 

However, the home equity loan provider still has the right to the security within the credit agreement – i.e. your property. 

Even though the home equity loan debt no longer exists, you will need to keep making the agreed monthly payments to keep your home. Otherwise, the lender may decide to initiate foreclosure proceedings. 

What is foreclosure?

Foreclosure is the process a lender will follow to force the sale of assets secured by a credit agreement. In the case of a home equity loan, the lender can force the sale of the property to recover some or all of the loan balance remaining. This may or may not be what you hoped will happen. 

When a property is subject to foreclosure, the senior lien of credit gets first ‚Äúdibs‚Äù on the sale proceeds. The senior lien of credit would be the residential mortgage lender. So that lender would take as much money as they’re owed from the sale proceeds, which might not leave enough money for the second mortgage lender, i.e. the junior lien of credit. 

What is a Deed of Acknowledgement?

A Deed of Acknowledgement is a document that a home equity loan lender might ask you to sign after a Chapter 7 bankruptcy. It could make you liable to owe any shortfall between the debt amount and the property’s eventual sale proceeds. 

In other words, it could make you continue owing the home equity loan even after you’ve been discharged from the Chapter 7 bankruptcy. Most people won’t want to sign the Deed of Acknowledgement and you should seek legal advice before doing so. 

What happens to home equity loans after a Chapter 13 bankruptcy?

A home equity loan may remain in place with the current or an adjusted repayment plan as part of a Chapter 13 bankruptcy. 

Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy usually wipes the individual’s liability to repay unsecured debts only, allowing them to maintain payments that are secured by property so they can continue living in the property as normal without the threat of foreclosure. 

Can you get a line of credit with a bankruptcy?

Once the bankruptcy process is over, there are no formal restrictions stopping you from applying for more credit. It will come down to the lender to decide whether they wish to offer you credit. They will analyse your personal finances and your credit report to make a decision. 

Getting any kind of loan after bankruptcy is usually challenging, including unsecured debt – but it’s not impossible. 

Home equity loan after bankruptcy discharge – is it possible?

Yes, it’s possible to get a home equity loan after bankruptcy. If you were able to keep your home during the bankruptcy process, you will be allowed to apply for either a home equity loan, a HELOC, or you might be able to remortgage and borrow more. 

Whether the application will be accepted will depend on the lender, affordability and your credit history. 

Chapter 7 bankruptcies usually remain on your credit history for ten years, while a Chapter 13 bankruptcy will stay on record for up to seven years. 

Pay off debts – bankruptcy Vs home equity loan?

Debt consolidation is one of the reasons some people take out a home equity loan, even without a job. They use the money to pay off other debts with other lenders, such as a personal loan or credit card debt.

By using the money, they reduce the number of lenders they have to deal with and can possibly save money on the interest paid out each month, especially considering home equity loans offer competitive rates. 

Some people may be weighing up a home equity product to consolidate debts against bankruptcy. This is best discussed with a finance professional who can assess your personal circumstances and provide informed advice. You could also chat with Citizens Advice about your options. 

What are the pitfalls of a home equity loan?

The biggest pitfall of taking out a home equity loan is not being able to keep to the repayments. If this happens you could have the property repossessed and sold. To mitigate the risk of failing to repay, you should only borrow what you need, not what you can get. 

You should also be aware of all the fees and charges when taking out these loans, including closing costs which can be a small percentage of the total loan’s value.